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Profit-sharing (Mudarabah)

A profit-sharing agreement (Mudarabah) has features of both agency (Wakala) and joint venture (Musharaka) facilities as it is an arrangement whereby one partner contributes capital into a commercial enterprise, while another partner provides expertise and management skill.

The capital contributor is known as the rabb-ul-mal and the managing partner is known as the mudarib.

Both parties agree a profit ratio at the outset, with the investing partner usually receiving a majority of the profits while the managing partner receives the remainder and, if agreed, a performance fee for providing his entrepreneurial skills.

(1) The investing partner enters into a profit-sharing agreement with the managing partner to form a enterprise with the purpose of generating profits on the principal amount;

(2) The investing partner will contribute capital;

(3) The managing partner will contribute management skill and experience;

(4) The investing partner will take a pre-agreed ratio of the profits, which will be accrued until the end of the enterprise;

(5) The managing partner will take the remaining profits, which are accrued until the end of the enterprise, and potentially a performance fee.

We are can advise parties on all the key considerations, some of which are set out below:

Ratio of profit division

Asset tangibility

Obligations of the managing partner

Limitation of liability for each partner

Any required purchase undertakings

If you are considering entering into a Shari’ah profit-share arrangement as investor or manager, please phone our London office on +44 (0) 20 3588 3500 and talk directly to one of our lawyers. Alternatively, you can request a call back and we will be in touch at a time convenient to you.

Saracens Solicitors Ltd is registered at Companies House (company no. 6532280) and their registered offices are situated at Strand Bridge House, 140 Strand, London WC2R 1HH. Saracens Solicitors Limited is authorised and regulated by the Solicitors Regulation Authority (SRA number. 486657). We use the word 'partner' to refer to a shareholder or director of the company. Saracens Solicitors are also regulated by the Financial Conduct Authority and are members of The Law Society, APIL as well as Resolution.

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